Among the 100 largest public pensions, a third have reduced their interest rate assumptions.

That’s according to Milliman’s 2017 Public Pension Funding Study, which also finds that there’s a 79-basis-point gap between the sponsor-reported discount rate and independently-determined rate assumptions—indicating that further reductions are likely.

Based on information that was reported by the plan sponsors at their last fiscal year ends—for most, June 30, 2016—the study finds that plan assets were still showing the effects of market downturns in 2014–2015 and 2015–2016.

Total plan assets as of the last fiscal year ends stood at $3.19 trillion, down from $3.24 trillion as of the prior fiscal year ends (generally June 30, 2015).

But since the last fiscal year ends, market performance has been strong; estimated aggregate plan assets are up to $3.44 trillion as of June 30, 2017. The study estimates that the plans experienced a median annualized return on assets of 11.49 percent in the period between their fiscal year ends and June 30, 2017.

When it comes to the aggregate funded ratio for the country’s largest public pension plans, as of June 30 of this year it’s estimated to be 70.7 percent; that’s up from 67.7 percent at the end of the plans’ latest reported fiscal years, usually June 30 of 2016.

Total pension liability at fiscal year ends for the 100 public plans was an aggregate $4.72 trillion for more than 26 million members; that’s estimated to have risen to $4.87 trillion as of June 30 of this year.

However, Milliman’s analysis estimates that total liabilities for these plans could be higher.

The study recalibrated total pension liability for each plan, based on market consensus that long-term investment returns have been falling and using independently determined interest rate assumptions.

For this study, “interest rate” indicates the assumptions plan sponsors have chosen to determine their contribution amounts, while “discount rate” indicates the rate used to measure liabilities for financial reporting purposes.

In aggregate, Milliman estimates the recalibrated TPL for these 100 plans is $4.98 trillion as of their fiscal year-ends; that’s $260 billion higher than reported by sponsors.

“"In this low-interest-rate environment, market expectations on investment returns have been falling faster than plan sponsors can reassess rates,” Becky Sielman, author of the study, says in the report, adding, “And the gap that creates between sponsor-reported and our recalibrated market-based liabilities is widening, which is all the more reason plans should continue to monitor emerging investment return expectations and adjust their assumptions as needed.”

Plan sponsors report a median discount rate of 7.50 percent, with a spread of 6.50–8.50 percent, but Milliman’s assessment of the expected real return for each plan’s investments puts the median rate at 6.71 percent.

That’s lower than all but six of the 100 sponsor-reported rates. According to the analysis, despite the fact that a third of the plans lowered their discount rates since the last study, this gap between sponsor-reported and independently determined rates continues to widen, indicating further reductions in discount rates will be likely in the coming years

Instant Insights /

What to know about public pensions & interest rate assumptions

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